Yahoo remains in talks with AOL

Yahoo Inc., facing dimming prospects for a takeover by Microsoft Corp., is continuing discussions to buy Time Warner Inc.'s AOL business, people familiar with the matter said.

Yahoo and Time Warner executives have met in the past few weeks and continue to negotiate over terms, said two people familiar with the situation.

Time Warner would hand over AOL's advertising business to Yahoo in exchange for a stake in the combined company, said the people, who declined to be named because the talks aren't public.

A deal would bolster Yahoo's position in the market for so-called display advertising and add subscribers for services such as e-mail and instant messaging. Yahoo and AOL would need to cut as many as 3,000 jobs for the deal to pay off, said Jeff Lindsay, an analyst at Sanford C. Bernstein in New York.

Differences remain between the two sides and an agreement may not materialize, two other people familiar with the discussions said.

Microsoft chief executive Steve Ballmer said Wednesday that acquisition talks with Yahoo are "done," contributing to a 21 percent decline in Yahoo's shares. Still, Ballmer said a partnership between the companies in the Web-search market is an "interesting possibility."

A Time Warner spokesman and a spokeswoman for Yahoo, both declined to comment.

Yahoo fell 19 cents, or 2.1 percent, to $8.95 in Nasdaq Stock Market trading, reaching the lowest level since February 2003. Time Warner fell $1.07, or 13.1 percent, to $7.07 on the New York Stock Exchange.

Yahoo and AOL combined could save as much as $300 million to $500 million a year with workforce reductions and real estate savings, said Sachin Shah, an analyst with ICAP Corporates LLC in Jersey City.

A transaction that values AOL at about $6 billion would make sense for Yahoo, assuming AOL can continue to receive payments from its Internet-search partnership with Google, Lindsay said. Google agreed to pay $1 billion for 5 percent of AOL in 2005.